Australia Monetary Policy March 2017

Australia: RBA stays put in May

March 7, 2017

At its 2 May monetary policy meeting, the Reserve Bank of Australia (RBA) held its cash rate steady at 1.50%, an all-time low after two 25 basis-point rate cuts in 2016. The Board’s decision to keep the cash rate unchanged was widely expected by market analysts and underpinned by optimism as global economic conditions and commodity prices continue to improve, a view moderated by a weak labor market and low inflation at home.

The latest monetary decision reflected diverging trends in the Australian economy. The Central Bank considers it necessary to maintain lax monetary conditions to prop up inflation and support the domestic economy amid weak wage growth and disappointing data from the labor market. Inflation, which crossed the Reserve Bank’s target band, matched the institution’s estimate and is expected to continue rising buttressed by strengthening economic activity and lax monetary policy. On other hand, the Bank is reluctant to lower rates from its current all-time low. Lowering rates could encourage households to accrue more debt and hinder the RBA’s efforts to cool down a skyrocketing housing market.

On balance, the RBA has chosen to take a wait-and-see approach to its monetary policy stance. The current stance is consistent with its objective of reaching the inflation target over time and achieving “sustainable growth in the economy.”

FocusEconomics Consensus Forecast panelists see the cash rate remaining low this year and finishing 2017 at 1.40% on average. Our panelists see it rising next year, with an average Consensus of 1.70% by year-end.

Australia’s economy slowed considerably in the third quarter, dragged down by a sharp slowdown in consumer spending, according to figures released by the Australian Bureau of Statistics (ABS) on 5 December.

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